New accounting rule causes headaches for companies.The first quarter was generally good to greater San Fernando Valley San Fernando Valley Valley, southern California, U.S. Northwest of central Los Angeles, the valley is bounded by the San Gabriel, Santa Susana, and Santa Monica mountains and the Simi Hills. companies, but it would have been better if not for FAS 123 (R). The new accounting rule, that for many companies went into effect with the first quarter of 2006, dragged down earnings at most firms, in many cases by $0.03 or more per share. While public companies generally accounted for the reductions in their planning and guidance prior to the quarter's close, the complexity of the roles along with differences in interpretations made for headaches and disappointments. "It's it's 1. Contraction of it is. 2. Contraction of it has. See Usage Note at its. it's it is or it has it's be ~have just been a huge headache headache Pain in the upper portion of the head. Episodic tension headaches are the most common, usually causing mild to moderate pain on both sides. They result from sustained contraction of face and neck muscles, often due to fatigue, stress, or frustration. for our accounting and finance folks," said Erik Randerson Randerson is a surname, and may refer to
This page or section lists people with the surname Randerson. , director of investor relations Investor relations The process by which the corporation communicates with its investors. at Digital Insight Corp., a Calabasas-based developer of online banking software and services. "It's just created so much more complexity with the quarter close process and additional expense as well." FAS 123 (R) requires public companies to include stock options paid to executives as an expense. Those who did not do so before found that their financial results were reduced, by an estimated 3 percent for companies overall. Analysts generally reduced their earnings estimates in anticipation of the new rule, but they also tended to evaluate performance on results that excluded the stock option expenses in order to more accurately gauge companies' performance. Also cushioning the potential impact of the new ruling was the generally strong performance turned in by companies in the first quarter. Earnings at the 15 largest public companies in the greater San Fernando Valley rose by an average of 12 percent in the first quarter, even when the stock option expense was included, keeping the stock performance of these companies generally strong. In that sense, Valley companies pretty much reflected the business landscape nationwide in the small cap arena. "Small cap stocks have given investors a phenomenal six years of strong returns relative to large caps," said Dennis Jensen Dr Dennis Jensen (born 28 February 1962 in South Africa), Australian politician, was elected to the Australian House of Representatives at the 9 October 2004 federal election for the Division of Tangney, Western Australia, for the Liberal Party. . portfolio manager for the Russell 2000 Index Russell 2000 Index An index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. , which measures stock performance in the small cap category where most Valley companies also fall. "We'll we'll Contraction of we will. we'll we will or we shall we'll will ~shall see if the shift toward large caps in April has staying power, but for now the Russell 2000 remains the clear leader for 2006," Jensen wrote in a report on the stock market in April. Among the top 15 Valley companies, only specialty retailer Guitar Center and American Reprographics Duplicating printed materials using various kinds of printing presses and high-speed copiers. Co., a provider of copying services and technology, saw net earnings fall in the quarter compared to the first quarter of 2005. Guitar Center Inc., which reported earnings of $15.7 million or $0.55 per share versus net of $15.9 million or $0.56 per share for the comparable period a year ago, logged stock-based compensation expenses of $900,000 or $0.03 per share for the quarter. Excluding that expense, charges resulting from the retirement of its former CFO See Chief Financial Officer. and stock option expenses the company said should have been charged to the fourth quarter of 2005, Guitar Center would have reported net income of $18.6 million or $0.65 per share for the quarter. The company's revenues rose 18.8 percent to $470.7 million in the first quarter of 2006 compared to $396.3 million in the like period a year ago. Among Valley companies, the best performers in the quarter were Calabasas-based homebuilder The Ryland Group, which reported a 43.5 percent increase in net income to $90 million or $1.86 per share in the quarter, versus $62.7 million or $1.25 per share for the first quarter of 2005; and workers' compensation workers' compensation, payment by employers for some part of the cost of injuries, or in some cases of occupational diseases, received by employees in the course of their work. provider Zenith zenith, in astronomy, the point in the sky directly overhead; more precisely, it is the point at which the celestial sphere is intersected by an upward extension of a plumb line from the observer's location. National Insurance Corp., which saw earnings rise 46 percent to $57.5 million, or $1.55 per share, compared to $39.3 million or $1.10 per share in the like quarter of 2005. Ryland saw its closings rise 13.3 percent over the same period last year, although new orders declined 16.6 percent in the quarter. Ryland also noted that its corporate expenses rose to $16.5 million from $14.5 million in the prior year due to increases in both incentive compensation and the accounting requirements that took effect in the quarter. Many companies reported both their earnings accounting for stock option payments and excluding them. At The Cheesecake Factory, where earnings rose just 2 percent to $19.3 million or $0.24 per share, officials noted that the company would have reported a net income increase of 17 percent to $22.1 million and diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. net per share of $0.27 excluding stock option expenses. THQ THQ Toy Headquarters THQ Territorial Headquarters THQ Tehsil Headquarters (Pakistan) THQ The Holy Quran THQ Theater Headquarters Inc., which reported that it lost $7.9 million or $0.12 per share in its fourth fiscal quarter ended March 31, 2006 versus net earnings of $10.1 million or $0.16 per diluted share in the year ago period, also said that it expected its stock option compensation expense to reduce its earnings for its fiscal first quarter 2007 by $0.04 per share. Similarly, Semtech Corp., which has yet to release its earnings for the first quarter ended April 30, said it expects stock option expenses in the first quarter of its 2007 fiscal year to reduce its net income by $4.3 million to $4.8 million or about $0.04 per share. And ValueClick Inc., Internet advertising Delivering ads to Internet users via Web sites, e-mail, ad-supported software and Internet-enabled cellphones. Also called an "ad network," Internet advertising organizations act as a middleman between the advertiser and the Web sites and software publishers that display the ads. services and software provider, said stock option expenses in its first quarter totaled $3.3 million due to FAS 123 (R) and reduced its first quarter net income by about $0.02 per share. The company nevertheless reported net income of $9.8 million or $0.09 per diluted share compared to $8.7 million or $0.10 per diluted share in the prior year period. Digital Insight, which saw its net income on a GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). basis rise to $6.2 million or $0.17 per diluted share, compared to earnings of $5.7 million or $0.16 per share in the same period last year, while on a non-GAAP basis, excluding stock option and other expenses, the company would have earned $9.1 million or $0.25 per diluted share in the most recent quarter. By SHELLY GARCIA Senior Reporter
Accounting for Options
Some of those impacted by FAS 123(R)
Company Q1 2006 Q1 2006
Including Excluding
Option Expense * Option Expense *
The Cheesecake Factory $19.3M $22.1 M
$0.24 EPS $0.27 EPS
Guitar Center Inc. 15.7M 18.6M
0.55 EPS 0.65 EPS
Digital Insight Corp. 6.2M 9A M
0.17 EPS 0.25
* In some cases, other expenses are included
in the difference. Source: Company reports
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